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A budget for the elites, by the elites

Taxing basic needs heavily while exempting military and bureaucratic incomes has deepened economic disparities

By Shahbaz Rana |
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PUBLISHED July 07, 2024

The work done by Stefan Dercon, a British economist and a policy advisor of the Foreign Commonwealth and Development Office, about Pakistan’s elites strangling the country’s economy had impressed Prime Minister Shehbaz Sharif so much that he immediately hired him to help prepare a ‘home-grown’ economic plan.

But while Stefan Dercon was holding meetings with Shehbaz Sharif, the premier’s economic team, comprising long-tenured ‘trustworthy’ bureaucrats and a banker-turned-politician, was preparing a budget that would benefit those same elites and throw the country’s marginalized classes under the bus.

About a year ago in an interaction with me at the residence of a British diplomat, Stefan Dercon had emphasized that the motivations of Pakistani elites would not allow the economic growth and development of the country to be prioritized.

Dercon further argued that there was an underlying elite bargain for the status quo among powerful elite groups comprising the leading political class, leading business class, leading individuals in the military, leading figures in civil society, leading members of the civil service, intellectuals, and journalists.

He contended that all these groups have an implicit agreement to maintain the status quo – with growth and development not being a core motivation for the dominant political class or the military – and that economic policies are driven by a quest to retain power as part of a clientelist patronage-based state. Those not in power would attempt to disrupt any stability to gain power and control the clientelist state.

The British economist elaborated that the political class in Pakistan is in competition with the military over who should control access to the country’s resources. Ten months after my interaction, the talk with Dercon struck me when I went through the budget prepared by bureaucrats, a banker, and the International Monetary Fund. This budget has everything that an elite would wish despite the country going through its severe economic crisis.

However, it offers no solace or sympathy to those in desperate need of a helping hand by the state. Jean Jacques Rousseau (1712-1778) detailed a social contract between the government and its people – an agreement under which the citizens surrendered some of their rights in return for protection from the government. The state and the government have violated this social contract with the people and the budget 2024- 25 is proof of it strangling the economy through further consolidation of the elite capture.

Starting with the infant formula and cement, which is used both for constructing a home and a grave, both have been taxed and taxed heavily. The feed of chicken and cattle has been taxed and taxed heavily, as has been a child’s pencil and drawing book. The milk that would nourish that young child has also been taxed and taxed heavily as well. A poor family using a hundred units of electricity in a month is also exposed to an increase of 51 percent per unit cost from the 1st of July.

But Pakistani politicians, bureaucrats, and military generals have captured more resources. The National Assembly approved that no withholding tax will be charged on the sale or transfer of immovable property by “a war-wounded person while in service of Pakistan Armed Forces or Federal or Provincial Government or an ex-serviceman and serving personnel of armed forces or ex-employees or serving personnel of Federal and Provincial Government” in respect of any piece of land that is allotted to it by any federal, provincial or by any authority.

We are in full support of taking care of the families of our martyred and also appreciate the government’s action to take care of the nation’s wounded soldiers. Because of them, we are safe today. But no rationale mind can defend the income tax exemption for a military general, for an ex-serviceman, for a retired bureaucrat, and for a serving bureaucrat that also including the Chairman of the Federal Board of Revenue and the Federal Finance Secretary who got these exemptions inserted in the law.

Against any tax exemption that the government approved in the budget or did not withdraw an existing one, the IMF forced Pakistan to take additional tax measures equal to the amount. Because of a story published timely by The Express Tribune and prompt intervention by Deputy Prime Minister Ishaq Dar, at least Rs60 billion worth of income tax relief for Pakistan’s most profitable banking sector was thwarted at the eleventh hour.

In May 2023, the National Assembly defrosted allowances for employees working from grades 1 to 22. The Parliament House allowance, previously up to 60 percent of the existing salaries of grade 1 to 22 employees, was set at 100 percent of the running basic pay for all employees. Similarly, the fuel and electricity subsidy for grade 1 to 22 employees was increased from 35 percent to 65 percent of the running basic pay.

The government gave financial cover to these additional perks for the bureaucrats in the budget by increasing the budget of the National Assembly and the Senate. To finance this huge spending, the National Assembly budget was increased to Rs7.3 billion for this fiscal year, up by Rs2.3 billion or 46 percent. The Senate of Pakistan received a record Rs5.2 billion budget, also higher by Rs1.9 billion or 58 percent.

There has also been a significant increase in the expenses of the President of Pakistan’s office. A record Rs2.2 billion budget was approved for the staff, household, and allowances of the president, which is 62 percent or Rs880 million higher than the last fiscal year. The story does not end here. On June 12, the government proposed to withdraw unnecessary income tax and sales tax exemptions for erstwhile Federally Administered Tribal Areas (FATA).

These areas have already been merged in the Khyber-Pakhtunkhwa province. A five-year exemption had been approved for these areas in 2018 to bring them at par with other settled areas but that had already ended in 2023. The government is now extending this exemption every year through the budget.

The erstwhile FATA would continue to enjoy the tax-free status and this year it would cost Rs52 billion to the nation. The exemption is mostly availed by the industrialists who have set up factories in these areas but supply goods to the settled areas of Punjab, outpacing the tax-paid industries from the market.

All these exemptions have to be financed by someone and like the previous year, the axe falls again on lower and middle classes. Are you listening and reading Stefan and can you please tell the Prime Minister, as you are still advising him on a long term plan?

On the advice of the government of Prime Minister Shehbaz Sharif, the National Assembly increased the effective income tax rate of a salaried person to 39%, for association of persons to 44% and for the non-salaried individuals to 50%.

These measures are now making it difficult not only to live in the country but also have made it expensive to leave the country due to increase in taxes on travel. The government has also massively increased the FED rate on international travel tickets to generate additional Rs55 billion in the next fiscal year.

The government imposed a 10% surcharge on the income tax of an annual income of Rs10 million. This would effectively increase the income tax rate for the salaried person to 39% and 50% for the non-salaried individuals. The Association of Persons will be charged 40% income tax and after adding the impact of a bizarre surcharge, these firms will pay 44% income tax.

The dilemma is that the government and the powerful circles have not even realized what it has done to Pakistan’s poorer, low middle, middle income and upper income groups. In normal and healthy societies and in true democracies, these class make the backbone of the economy.

But Prime Minister Shehbaz Sharif and his banker Finance Minister has crushed these classes under the inflation.
What pains more is the lack of sympathy and realization by the government of the sufferings of the common men, women, children, and old age people.

Some ‘golden quotes’ from the budget approval days:

“We have imposed sales tax to encourage mothers to breast feed their child,” said Amna Faiz Bhatty -a woman Member Income Tax Policy of FBR when she was asked rationale for imposing 18% GST on infant milk.

“The middle and upper middle income groups people drink packaged milk and they can afford to pay 18% GST,” said Pakistan’s banker Finance Minister Muhammad Aurangzeb in his post budget press conference.

Probably, the country’s milk manufacturing factories have taken the words of the Finance Minister more seriously and they have increased the prices by Rs75 per liter or 25% in one go. Now it is said that milk in Paris is cheaper than in Karachi.

Would the Finance Minister care to justify that can a nation afford to tax milk when the stunting rate is 40% and the poverty rate is 41%?